CASH BUDGETING AS A BASIS FOR DECISION MAKING. (A CASE STUDY OF AGUATA LOCAL GOVERNMENT AREA).
The research project was on cash budgeting as a basis for decision making (A case study of Aguata Local Government Area).
The whole work has been divided into five chapters.Chapter one, Introduces the project Chapter two, talks on literature review Chapter three takes care of the methodology Chapter four is about data analysis and Chapter five is about summary, conclusion and recommendation.
In carrying out this project the researcher applied two pronged approaches to sounding of data.
The two approaches were the primary and secondary source of data collection.
In case of the primary approach researcher developed a list of questionnaire which she distributed to respondents. The second data collection utilized library research, textbooks, journals and unpublished lecturers. The questionnaire is attached as an appendix on the end of the work.
The data were analysed in form of hypothesis by using chi-square form of analysis the researcher found out that some project were started and abandoned half way while some other establishments adhere strictly to their cash budgets.
In her conclusion, the researcher said that cash budgeting is an important management tool both in public and private sectors.
Finally, the researcher recommended that orientations programme should be organised for new staff, that modern accounting equipments should be bought and put in use, that monthly cash budget should be introduced to take care of fluctuations in the economy and that management should install effective financial rewards as motivation towards meeting the organisations budget objectives.
1.1 BACKGROUND STUDY
Cash is represented by those monetary items immediately available to management for business purposes. Cash includes commercial and savings deposits in banks and else where, available on demand and money items on hand that can be used as a medium of exchange or that are acceptable for deposit at face value by a bank. Cash is involved in most business transactions. This is due to the nature of business transactions, which include a price and conditions calling for settlement in terms of medium of exchange.
For instance, the movement of cash completes almost all purchases and sales transactions. Purchases of goods and services normally result in cash payments while sales normally in cash receipts.
“Business and individuals have these primary motives for holding cash and these are the transactions motive, the precautionary motive and the speculative motive”.
(i) The transactions motives enables firms and companies to conduct their ordinary business making purchase and sales.
(ii) The precautionary motives depends on the predictability of cash flow and the ability of the company to borrow on short notice. This motive enables a firm to provide enough find as a protection against unexpected demand.
(iii) The speculative motive enables the organization to take advantage of such unexpected opportunities as may arise.
Moreover, sound making working capital management requires the maintenance of adequate amount of cash for certain specific reason.
(i) Sufficient cash per nuts taking trade discount.
(ii) Adequate liquid assets are required to strengthen the current and acid test ratio which are key items in the appraisal of a firm’s credit worthiness.
(iii) To take advantage of profitable business opportunities as cash is a major requirement.
(iv) Adequate cash is necessary to provide a firm with sufficient liquidity to meet various emergencies.
It is disadvantageous to hold no cash. The costs appear less obvious and rather more difficult to quantities these include the inability of the firm to meet bills as they fall due, the opportunity cost of being unable to take any unexpected opportunities (like buying some cheap stock for cash) and cost associated with having to borrow cash at expensive short-term rates in order to satisfy unexpected urgent demand.
Whatever the cost, it is the responsibility of management to balance these costs with each other so as to ascertain and maintain that optional level of cash to be the use of such budgeting is one method of attaining this level.
This (cash budgeting) is usually done only a year in advance or on a monthly basis. The cash inflows and outflow estimated for cash period are identified and the likely cash balance projected from them. Steps cash then be taken at an early stage in the planning process to illustration.
Cash inflow January (N) February (N) March (N)
Debtors 10,000 11,000 110,000
Cash sales 2,000 2,000 2,000
Total inflow (X) 12,000 13,000 11,000
Creditors 7,000 8,000 10,000
Wages 4,000 4,000 4,500
Total out flow 11,000 12,500 14,000
(X – Y) 1,000 500 (3,500)
SURPLUS/DEFICIT 1,000 1,500 (2,000)
The above illustration shows that cash surpluses are expected in January and February where as in March, a deficit is expected. If there were no cash deficit is expected. If there were no cash in the bank on 1st January, the bank balance at the end of each month would be given by the cumulative surplus (deficit) figure above.
On the basis of this budget, management must decide on how it is going to overcome the March deficit and how to use the finance February, it should seek to ahead and budget and other financial management tools like current ratio and liquidity ration.